Exploring and keeping readers up to date with the growing economic and political ties between China and South America. Including all the good stuff: Commodities, Energy, International Finance, South-South Cooperation, Microfinance and more

Friday, November 28, 2008

With the world economy faltering, recovering, crashing, entering crisis, deflating, **input whatever other term you've been reading** many are hoping China will some how cushion the global down turn. Lets consider this from both ends of the spectrum.

There's one side of analysts, experts, observers, etc who believe the Chinese economy as the largest contributor to global GDP growth the past few years is in a position in which it can help the global economy move through this economic depression. Then there's the other side that inexorably links the Chinese economy to rich country demand for their cheap exports... which is decreasing at an alarming rate according to the figures.

From the perspective of a young economist who is currently living in Suzhou, China the truth lies somewhere in the middle. Before you (the readers) close this page and assume that's the obvious answer hear me out. It's not that simple...

From the window of the pizza place, which offers me high speed internet where I am currently writing this post from I see the following.

Fireworks exploding in the distance to celebrate the grand opening of something big. I don't know for what, but if i've learned anything from the past few months of living in Suzhou, a show of this caliber means the following: the government is celebrating some major achievement, a big night club has something to brag about, or perhaps a shopping center or a residential complex is opening its doors. Fireworks are a usual tactic employed as way to dazzle the populous, attract business and of course... to ward of bad spirits (which is what the tradition of exploding fireworks in China is traditionally for).

I can also see various cranes in the distance, where workers are building various new structures six days a week. These include 15-20 floor apartment complexes, 20-45 floor office buildings and other structures which I would guess will have something to do with the government.

The third thing I can see, which is worthy of mention is a giant fenced off whole in the ground which blocks the pedestrians view of the construction work underway for a new subway system set to open in 2010.

These points support the first side of the story. The Chinese economy, on the domestic front is going to keep growing even if the rich countries of the world slide even further into recession. A “Pandora's Box” of sorts has been opened here in China. The opening of the Chinese economy, the robust growth of the past two decades, the massive migration of hundreds of million of rural residents to urban centers, massive inflows of FDI and a variety of other factors have created a situation where the central government must needs to either facilitate to the best of its ability or risk imploding from within.

The recent decrease in commodity prices will only help China keep its modernization / urbanization/ domestic growth (whatever you want to call it) going. Six months ago, I was analyzing how demand was so strong in China that it mattered little in the long run how high the prices of commodities went, because in the end the Chinese would not abandon their aspirations to well... keep growing. From this perspective, plummeting commodity prices (much to the detriment of my senior thesis in which I predicted they would keep rising) is a blessing in disguise.

China's recent $586 billion stimulus package and the record slashing of Chinese interest rates is an effort by the government to keep this going. Infrastructure, housing and all that jazz will continue. This means jobs and therefore continued consumption by consumers. This also means China will keep buying the commodity inputs they need to build. So, to conclude this side of the story, this means China will continue to grow.

However, and now here comes the “dark side.” Even the two trillion plus dollars in foreign reservers Beijing claims will finance all of this, can not and will keep this going indefinitely. The money will run out, or more likely simply start to no longer be worth spending if the rest of the world, particularly the rich world doesn't get out of this global economic crisis.

Living in the wealthy Jiangsu province, home to the city I live in (Suzhou), Shanghai, Nanjing, Hangzhou (VERY wealthy cities), and various government projects I'd call the crown jewels of the governments efforts at modernization it is hard to imagine what the rest of the country is like from time to time. Due to the lack of internet and the lack of available information I havn't exactly been up to date on certain things.

“Small companies face a “tough winter,” said Li, whose organization claimed 76,000 members in the first half of this year. Two-thirds of China's small toy makers closed in the first nine months, according to customs data."

So in conclusion... as I stated above, the truth lies somewhere in the middle. If the rich countries of the world don't start buying again, China will stop growing as fast as it has been. That is just how it is. A large portion of the Chinese economy is still heavily depended on exports, and if that disappears it doesn't matter what happens on the domestic front.

China will have to face the facts. The effects will be catastrophic and horribly de-stabilizing. Which is why China is going to try to do everything in its power to present such a catastrophe from occurring, and if that means helping out more to revive the global economy I think China will assume a more active leadership role. So far it seems they have. How far they will go will only be seen in the months to come.

It's anyone guessing game at this point. Lets see where the next few months lead.